Andersen's past becomes an issue

Judge rules it's OK to mention earlier clients' fiascos

By

LisaSanders

HOUSTON (CBS.MW) - Andersen's defense team scored a point on the opening day of the accounting firm's criminal trial for obstruction of justice when the prosecution's first witness - a Securities and Exchange official - indicated he didn't know exactly what Andersen was on trial for.

But prosecutors won a victory of their own when the judge ruled she would allow some testimony relating to Andersen's prior dealings with companies that were investigated by the SEC after restating financial results.

Andersen is charged with obstruction of justice in connection with the shredding of documents relating to the flameout of energy giant Enron
ENRNQ
Fired Andersen partner David Duncan has already pled guilty in exchange for a lesser sentence and agreed to cooperate with the government. He is scheduled to take the stand Thursday.

Following opening arguments Tuesday, the prosecution brought in an SEC official to show the jury that the former accounting giant knew what it needed to do to keep Enron-related documents away from authorities.

Earlier, lead defense attorney Rusty Hardin argued against the prosecution's bid to bring up prior instances involving clients Waste Management
WMI, -1.04%
and Sunbeam, which ultimately went bankrupt. The SEC launched formal investigations of both companies after each restated their financial results.

In Waste Management's case, the $1.7 billion loss in earnings led to a $6.4 billion reduction in capitalization. A district court judge in Washington assessed a $7 million fine against Andersen - the largest ever sought by the SEC.

U.S. District Court Judge Melinda Harmon denied the defense's motion, but gave strictly instructed the jurors they could only consider the SEC's investigations of Waste Management and Sunbeam if the evidence showed that Andersen intended or had a motive to obstruct justice.

In the Enron engagement, Andersen allegedly persuaded employees to shred the bankrupt energy giant's work papers, e-mails, memorandums and a host of other documents so the SEC wouldn't have access to anything but the final version of the audit.

"Remember, Andersen is not on trial for auditing mistakes," Judge Harmon told the jury.

During cross-examination, Hardin told Newkirk that he was mistaken and asked if he'd read the prosecution's indictment, which states the obstruction of justice charge.

Newkirk indicated he had read the indictment.

Hardin also took issue with Newkirk's admission that he was not working on the Enron investigation and did not know any of the Andersen partners or staff that worked on the Enron engagement.

"Why are you here then?," he rhetorically asked Newkirk, who supervised both the Sunbeam and Waste Management investigations.

In both of the earlier investigations, the SEC asked Andersen to produce documents related to the companies, as it did with Andersen's work on Enron's audit.

In the Sunbeam case, no claim was brought against Andersen as a firm. In the Waste Management case, the court not only assessed a fine but it issued a permanent injunction prohibiting Andersen from violating securities laws in the future. The SEC also censured the firm for "issuing materially false and misleading information."

In opening arguments, Matt Friedrich, a federal prosecutor, told the jury that the auditor deliberately destroyed documents that it knew the SEC wanted in its investigation of the firm's dealings with Enron.

"Andersen knew the law would come knocking on their door in a series of billion-dollar accounting errors that came under their watch. And they knew they were in deep trouble," Friedrich said.

Friedrich said Andersen's Enron team moved to shred files, destroy documents and delete e-mail to keep information out of the hands of law enforcement officials. He noted that the auditors knew they had a window of opportunity to destroy evidence because they were familiar with how the SEC worked.

Andersen attorney Hardin countered that Andersen's Enron team had not destroyed documents with this intent, calling the case one of the "greatest tragedies of criminal justice in this country."

Hardin contended that the existence of internal Andersen documents contradicts the prosecution's case that the firm destroyed all of the germane Enron documents. "We will show the documents at the heart of the government's case were the documents that were retained," said Hardin.

Prosecutors have made it clear that a key part of their case will focus on the most controversial element of the indictment -- namely, that the whole Andersen partnership could be convicted of a crime even if only one partner committed it.

The jury, which began the first day of the trial attentive and busily taking notes, appeared to flag by Tuesday's end during Hardin's intense questioning of Newkirk.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.